3/29/2010 @ 2:15PM

Bulls Go For Cigarettes

ArvinMeritor
: The global supplier of integrated systems, modules and components for a variety of automotive vehicles and trucks realized a slight 0.05% increase in the value of its shares to $13.70 Monday. Options trading patterns on the stock indicate some investors expect ArvinMeritor’s shares to rally higher and settle at $15 by May expiration. Investors sold straddles on the stock in the May contract to take in available options premium Monday. Approximately 7,000 calls were sold at the May $15 strike for a premium of $0.70 each in combination with the sale of about 7,000 puts at the same strike for an average premium of $1.28 apiece. Gross premium pocketed by straddle-sellers amounts to $1.98 per contract. Investors keep the full premium received if ARM’s shares settle at $15 at expiration. The $1.98 premium received Monday provides a buffer against potential losses in the event that shares do not trade up at $15.00 in the next couple of months. However, straddle-sellers are vulnerable to potentially devastating losses if shares rally above the upper breakeven point at $16.98, or should shares sink below the lower breakeven price of $13.02, ahead of expiration day in May.

Lorillard
: Cigarette manufacturer Lorillard Inc. attracted near-term bullish options traders Monday despite a downgrade to hold’ from buy’ at
Deutsche Bank
. Shares of the underlying stock slipped 0.35% during the first half of the trading session to $75.74. One optimistic individual initiated a bullish risk reversal on Lorillard by selling approximately 12,500 put options at the April $72.5 strike for an average premium of $0.75 apiece, spread against the purchase of the same number of call options at the higher April $80 strike for $0.40 each. The investor responsible for the reversal play pockets a net credit of $0.35 per contract, which he keeps as long as Lorillard’s shares trade above $72.50 through April expiration day. Additional profits accumulate should shares of the underlying stock rally at least 5.6% over the current price to surpass $80 by expiration. The short sale of put options implies the trader is willing to have Lorillard-shares put to him at an effective price of $72.15 apiece should the puts land in-the-money ahead of expiration day. The spike in demand for options on the stock lifted the overall reading of options implied volatility 17.2% to 28.02% by midday.

Mohawk Industries
: The manufacturer of floor covering products for residential and commercial applications enticed bullish players after receiving a new rating of buy’ with a 12-month target share price of $63 at Ticonderoga Securities this morning. Mohawk’s shares jumped 3.30% in the first half of the trading day to stand at $54.90. Optimistic options traders positioned for continued upward movement in the price of Mohawk’s shares by purchasing call options in the April contract. Investors picked up 1,400 calls at the April $55 strike for an average premium of $1.31 apiece. Shares must exceed the current 52-week high on the stock of $55.21 and surpass the effective breakeven point on the calls at $56.31 before call buyers accrue profits. Bullish traders also purchased 2,500 call options at the higher April $60 strike for an average premium of $0.32 per contract. Higher-strike call coveters stand ready to accrue profits should Mohawk’s shares rally 9.9% to breach the breakeven point at $60.32 ahead of expiration day in April.

Vertex Pharmaceuticals
: Shares of biotechnology company, Vertex Pharmaceuticals, slipped slightly lower by 0.05% to $41.59 Monday. Perhaps anticipating continued downward momentum in the price of the underlying shares, one options investor enacted a bearish risk reversal in the October contract. The trader sold 2,500 calls at the October $50 strike for a premium of $2.20 apiece in order to offset the cost of buying the same number of puts at the lower October $30 strike for $1.60 each. The reversal player receives a net credit of $0.60 per contract on the transaction, which he keeps if Vertex’s shares trade below $50 through expiration day in October. Additional profits accumulate to the downside if shares of the underlying stock plummet 27.9% from the current price to breach the $30-level ahead of expiration. Shares last traded below $30 back on June 10, 2009.

Mead Johnson Nutrition
: The global provider of pediatric nutrition products received a long-term vote of confidence by one bullish options trader Monday amid a share 6.5% rally in shares to an intraday high of $52.17. Shares slipped slightly during the first half of the trading session, and are currently flat at $51.83. The optimistic options investor financed the purchase of a debit call spread in the January 2011 contract by selling short 4,000 put options at the January 2012 $40 strike for an average premium of $2.94 apiece. The trader purchased 4,000 in-the-money calls at the January 2011 $50 strike for $6.60 each, and sold 4,000 calls at the higher January 2011 $65 strike for $1.70 apiece. The net cost of the three-legged combination play amounts to $1.96 per contract. Thus, the investor is prepared to accrue maximum potential profits of $13.04 per contract should Mead Johnson’s share price surge more than 25% from the current price of $51.83 to surpass $65 by expiration day next January. The investor makes money on the trade as long as shares exceed the breakeven price of $51.96 by expiration.